Getting started in ASX investing is probably the hardest part of the whole journey that you will undertake as an investor. But choosing the path you wish to tread that journey on is probably a close second. As you mature as an investor, at some point you will have to decide what kind of strategy you wish to follow for investing your capital into Aussie companies.
There is no right answer either. Many of the world's most successful investors – Warren Buffett, Bill Gates, Ray Dalio and Peter Lynch, to name a few – have all chosen different paths but ended up at similar ends (enormous wealth).
So here are some of the most common strategies you can follow if you wish to refine your investing techniques in 2020 and beyond.
Growth Investing
This has probably been one of the most popular investing paths in recent years. Growth investing involves finding fast growing companies (preferably before anyone else) and 'riding the wave' up as the company grows.
If that company's growth hiccups or stalls, growth investors will often quickly jump ship and look for the 'next winner'.
Growth investors are normally not too concerned with buying shares at a 'discount' (more on that later) or what kind of dividends their companies pay. In its essence, it's a strategy purely concerned with 'buying low and selling high'.
Some popular ASX growth stocks include WAAAXers like Altium Limited (ASX: ALU) and Afterpay Ltd (ASX: APT), as well as market darling CSL Limited (ASX: CSL).
Value investing
This style is the kind that Warren Buffett is famous for. Investors like Buffett look for share prices that are trading lower than what they deem a company to be truly worth (or buying $1 for 50 cents, as the ever-quotable Buffett likes to say).
Value investors love stock market crashes, as most shares often become available at a discount due to the widespread panic in the markets. Most of Buffett's stock positions were accumulated in the aftermath of crashes like the GFC, dot-com bubble burst, 1987 crash and so on.
Value investing generally advocates sticking with more developed companies like Woolworths Group Ltd (ASX: WOW) or Commonwealth Bank of Australia (ASX: CBA), for example. These kinds of companies have been around for a while, which often makes them more predictable and easier to value.
Dividend investing
As the name suggests, dividend investors value dividend cash flow above anything else. Building a stream of passive income that grows larger and larger over time is the ultimate goal here – and as such, dividend investors will normally only pick companies that either pay large dividends or are growing their shareholder payouts at a healthy rate (or both if you find a real winner).
Dividend investors usually follow some kind of 'buy-and-hold' strategy, as opposed to regularly trading in and out of positions. That way, dividend returns can compound over time and give investors a higher and higher level of cash flow.
The ASX is home to many formidable dividend payers, including companies like Westpac Banking Corp (ASX: WBC), Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES). A dividend growth investor might also like the look of CSL or a company like REA Group Ltd (ASX: REA) that might not pay a large yield now, but are growing it at a healthy rate.
Passive investing
Passive investing is (by far) the simplest form of investing and usually involves choosing cheap, 'passive' investment vehicles like exchange traded funds (ETFs) that follow whole markets rather than individual companies. For example, the Vanguard Australian Shares Index ETF (ASX: VAS) simply tracks the largest 300 companies in Australia. If a company falls out of the top 300, it is sold and replaced in the fund by the company that takes its place.
In this way, you can simply just keep throwing money at a single ETF consistently and expect an average rate of return over time, perhaps through a dollar-cost averaging strategy.
You can even balance an Aussie ETF like VAS with say a US-focused fund like the iShares S&P 500 ETF (ASX: IVV), which tracks the largest 500 American companies. Using one or more funds like these, passive investing gives an investor a lot of diversification whilst being very simple to execute as a strategy. That probably explains why it has exploded in popularity over the last decade or two.
Macro investing
This kind of investing is usually the domain of professional investors like Ray Dalio – and probably shouldn't be attempted by a beginner. It involves looking at shares as just one of the asset classes out there that responds in its own way to economic conditions. Macro investors might jump into shares just after a market crash and jump out into a 'safe' asset class like gold or bonds if they think the share market is overdue for a correction.
A thorough understanding of economics is usually necessary if you want to succeed as a macro investor, as variables like interest rates, inflation, currency valuations and commodity prices all come into play. If done well, this kind of style can be very successful and has helped Dalio's company Bridgewater Capital become the largest hedge fund in the world. But it's a very quick path to bankruptcy if you don't know what you're doing.
A combination
Of course, you can choose elements of multiple strategies if you find that works best for you. Many dividend investors like to buy their shares in a similar way to value investors. Lots of growth investors probably do a bit of passive investing on the side for some diversification or as insurance. Finding the right strategy that speaks to you and works for you is the most important thing, whether that fits into a neat pigeonhole or not.
Foolish takeaway
There is more than one way to skin a cat, as the old saying goes and I think the same logic applies to investing. Thus, I hope this piece has shed some light on why you might hear so many different 'strategies' being discussed by others, as well as how you can make investing work for you and your goals.
